Why Are Housing and Services More Expensive in Rich Countries than in Poor Ones? A Model of Neighborhood Housing Effect and its Evidence

Abstract

This paper examines why housing and services are more expensive in rich countries than in poor ones. We propose the Rich Neighborhood Housing Effect (RNHE), which explicitly allows for local labor force heterogeneity with a coherent supply-demand framework that incorporates demand-side factors such as the Linder effect. We also develop a contemporary RNHE model that predicts different behavior of the national price level between high-income and low-income countries. These predictions are confirmed by the panel data from 1990 to 2010 and simultaneous equation estimations. These results are compelling evidence in favor of the RNHE model over the Balassa-Samuelson model.

Download Entire Article

Keywords